Evan McKenzie on the rise of private urban governance and the law of homeowner and condominium associations. Visit evanmckenzie.wikispaces.com for my published articles and services.

Monday, January 02, 2012

Do owners believe CC&Rs are contracts, part trois...

Tyler Berding tried to comment my long post in response to the Pilot/Berding exchange, but Blogger rejected it as too long. I am posting Tyler's response here:

From Tyler Berding:

I agree with Evan that the vast majority of buyers of property within a common interest development do understand that there are covenants running with the land that impose certain restrictions on its use and financial obligations on them. Maybe not in those terms, but certainly they know that the roof isn’t maintained by the city, that you can't leave wrecked cars on their front lawn, that the property is managed by a board of directors, and that there is a community pool that isn't maintained for free. If they are truthful they will also tell you that they recognize that the assessment statement that arrives every month is to collect money to pay for something other than the annual Christmas party.

To suggest otherwise would be insulting to most owners. People do understand that there are obligations that must be met, and a high percentage meet those obligations and would look at you blankly if you told them that somehow they didn't have to pay the monthly assessment because it was not fully explained that they bought a home with covenants. The fact is that very few believe that--so we should get off of the "They were duped" soapbox. Yes, not only are CCRs covenants which can be enforced by the courts as can any contract, it is a business proposition that most people understand until they choose not to. So, no I don't agree that people fail to see their obligation to pay assessments for example, as a contractual obligation, just as most people don't fail to see their car payments, feeding the parking meter, property taxes, and mortgage payments also as binding obligations.

Now having said that, it is also clear that if any contract provision is extracted through deceit it can be deemed by a court to be without the owner's consent and hence unenforceable--as in, no contract ever existed. Courts have found provisions of CCRs imposed unilaterally by developers to be "unconscionable" and therefore unenforceable for that very reason--no consent. The courts of many states, for example, have invalidated such things as binding arbitration provisions imposed by developers. So if an owner can prove that they actually had no idea that they were buying a home which was bound by covenants, and can offer sufficient evidence to prove that they were misled, they might have a claim against their seller, and maybe a case for rescinding the contract and returning the house--but remember, that takes proof, not just a short memory, and no, you can't rescind the contract and also keep the house.

As Evan knows, I think that the debate over the legal nature of the relationship between a homeowner and their homeowners association is largely a distraction from the real problem which is that community associations are created mostly for the benefit of municipalities and developers, with very little insistence by government on a financial model that can remotely meet the expectations of the eventual homeowners. Community associations are dying financially. Their business model is fundamentally flawed and many will eventually become obsolete and fail. That is the real issue--not whether a board’s authority to enforce the governing documents is a legitimate exercise of police power, or of contract, or of whatever other legal or moral hook you choose to hang your hat on. And before anyone gives me a big thumbs down for that comment, consider another of Evan’s blog posts, the one today about a city threatening to shut down an association and evict the owners because they haven’t paid their water bill.

If you think that situation is an anomaly, then you have been spending too much time reading the Constitution and not enough time looking at the budget. Community associations are a financial disaster in normal times, and when hidden or unexpected damage or expenses arise, most associations lack the financial reserves to meet the demand. The water bill case is just one example. The average association does not have half the financial reserves it needs to properly maintain the expected issues—and they have zero funding for the unexpected.

So I guess my response to your post, Evan, and to Fred’s position, is this: While I think that community associations are creatures of contract--I also think we spend too much time debating such things as the legal structure of community associations as if that were somehow a fundamental problem. It isn’t, it’s largely academic, and in the big picture, it isn’t important. I can appreciate that it generates a lot of heat, but unfortunately not too much light. That’s because there is no conclusion—and there never will be because the reasoning is largely circular. “Boards of directors abuse owners because homeowner associations are not legitimate forms of government” Where would anyone start to respond to that? And please don’t tell me to check the U.S. Constitution. That truly would be circular.

But worse, that debate, while stimulating and capable of taking up many kilobytes of blog space, diverts us all from the more immediate discussion of how best to protect owners and preserve what little value remains in many of their homes. If large scale underfunding cannot be rectified, and I believe that with most existing condo associations, it cannot be, then it won’t matter whether the form of government is constitutional or not, or who created it, or if the governing documents were found in a Cracker Jacks box. Better, all of us should be discussing how to help owners save whatever remaining equity they have, and then second, how to convince government to quit mandating for sale housing that will inevitably become obsolete because it has a form of governance that cannot fund its operations--just for the sake of additional property tax revenues. Sustainability is an objective for which we might actually get consensus!

3 comments:

Anonymous
said...

Where to start?

The only positive thing I see in this post is that an HOA attorney admits that many involuntary membership associations have a flawed business model and will eventually become obsolete and fail. They are "dying financially". Good!!! The sooner the better.

Although Berding has a problem with the statement that "Boards of directors abuse owners because homeowner associations are not legitimate forms of government", he previously just discussed failure of the HOA business model.

What "business" is the HOA in if not privatized government?

I have huge problems with Berdings failure to distinguish between condo and HOA burdened property or rather blurring the distinction between them to create false "needs". Condo owners truly have an undivided interest in the so-called common areas - management of which is handled by the condo corporation. HOA homeowners have ZERO ownership interest in the falsely named "common areas". The property management by the HOA BOD is the property of the HOA, not the property of the owners. The HOA corporation does not manage the property that belongs to the owners - and owners do NOT "choose" to be "managed" by a corporation.

If the debate over the legal nature of the relationship between a homeowner and the corporation that burdens their property is a distraction, then why so much time spent litigating HOA issues? Inherent in Berding's comments was an assumption that "the CCRs" were ever written or have any ability whatsoever to achieve the pretextual objective they were allegedly created for. They weren't.

I find Berding's conclusion somewhat paradoxical in view of his earlier comments regarding governance. There is also a misplaced focus on "helping owners save equity". People choose housing first and foremost for shelter and to raise a family - not "to save equity". In addition, such pretextual objectives are the excuse for demanding more monies from homeowners - as if carrying costs are to be ignored. Regarding the "sustainability" objective, I would vehemently disagree. I for one, have no desire for the status quo of community corporations to continue and flatly reject them as an unconstitutional form of governance - and I am not alone.

HOA corporaionts might be a lucrative component of the business model of HOA VENDORS but involuntary membership corporations are a failed governance and business model for all the owners. There is no reason to "sustain" certain failure that comes with involuntary membership corporations. Better to eliminate mandatory membership - at least for HOA-burdened property.

It was not the owners who failed to pay their water bill, but a separate legal entity known as the community association corporation that failed to pay its water bill. The owners are not billed by the city for water.

"An enormous amount of those fees get shuffled off into the pockets of lawyers and property managers. Some of that goes for necessary activities. Some goes to pay making handicapped children use the back door, forcing people to tear down their kid's swing set or their political signs, or some other preposterous and antisocial enforcement action. Sometimes it goes to pay for elections that would shame a banana republic and quasi-judicial kangaroo courts. The ignorance would lie with anybody who claims to know what goes on in CID-land but doesn't know about the abuses of power that have led so many people to organize and try to change the situation."

About Me

I am a professor of political science at the University of Illinois at Chicago, and an adjunct professor at The John Marshall Law School in Chicago. Nothing contained in this blog represents the opinions of UIC or John Marshall, and nothing you see here is legal advice. You can reach me at ecmlaw@gmail.com